States Steal Federal Foreclosure Funds at Their Own Peril - Bloomberg
The U.S. housing market is showing tentative signs of life as demand for new homes and housing prices begin to rise in some areas.
Yet pitfalls remain, including about 12 million borrowers who still owe more on their “underwater” mortgages than their homes are worth. To help some of those people, the recent $25 billion national mortgage settlement required five large banks to pay states $2.5 billion for foreclosure prevention and other housing-related efforts.
Here’s the problem: many states -- including some hardest hit by the housing bust -- are diverting more than $1 billion of that settlement money to fill budget gaps, fund public universities and even bankroll litigation against defective Chinese drywall, according to a Bloomberg Government report. In doing so, states are robbing troubled borrowers of assistance and jeopardizing their housing recoveries in the process.
As this opinion piece observes, it is easy to understand why some states are doing this--they have huge budget imbalances that they have to fix. But the housing market is one of the mainsprings of the economy, and it needs to recover. Pilfering the mortgage settlement money is a short term strategy that retards the long term recovery.